Thursday, April 27, 2017

President Domald Trump's PEU stacked White House did look out for its own in tax reform.

Key point: Trump's plan would tax pass-through
entities at 15%, whereas they currently are taxed at individual rates.
This basically makes the carried interest debate irrelevant.

Result: This is officially aimed at small businesses, but
pass-through treatment also applies to a lot of hedge funds and real
estate funds (e.g., ones structured as LLC's). Moreover, funds organized
as limited partnerships likely would restructure to qualify as
pass-through entities for tax purposes (or at least firms would be sure
to raise the next one that way). In short, such fund managers could pay a
flat 15% tax on all of their income, including annual management fees
on which they currently pay individual rates.

Apparently Trump and Mnuchin helped billionaire PEUs without mentioning their name or their preferred carried interest taxation. It's a Trump PEU tax-palooza. David Rubenstein and Stephen Schwarzman will be able to add to their personal billions with a Trump tax break!

Wednesday, April 26, 2017

An open question is what
kind of treatment will be given to so-called carried interest.
That allows managers to pay a tax rate as low as 20 percent, a
loophole that Trump has railed against in the past.

Government of and by the private equity underwriter (PEU) will be hard pressed not to advantage themselves yet again.

Tuesday, April 25, 2017

There are more than 3,000 US private equity firms. They manage about $825 billion in assets, up from $80 billion in 1996. Two of the largest companies – the Carlyle Group and KKR – each have more than 720,000 employees in their portfolio companies.

While Carlyle and fellow private equity underwriters (PEU) grew tenfold worker pay stagnated and employers shifted cost and responsibility for healthcare and retirement to the employee.

PEU miserliness applies only to employees and taxes. Affiliates are very generous with interest expense and grand payouts to executives and sponsors.

President Trump's tax plan is expected to be a PEU boon.

Commerce Secretary Wilbur Ross said that the combination of changes
on taxes, trade and regulations being pushed by the administration would
accelerate the pace of economic gains.

"There is no reason that we should not be able to hit that — if not beat it," Ross said at the White House news briefing.

Ross came from private equity to the White House, as did many other Trump PEU appointees. It's billionaires looking after billionaires minted after 1980.

In 1980, there were only 24 private equity firms and deal volume only modestly exceeded $1 billion.

PEUs grew from 24 to over 3,000. Now every retired politician can be employed by one. Who needs a think tank or university? Politicians Red and Blue love PEU.

Sunday, April 23, 2017

"Big TAX REFORM AND TAX REDUCTION will be announced next Wednesday," the president announced in a tweet Saturday.

According to David Rubenstein, a co-founder of The Carlyle Group, Trump
“will no doubt have some principles that he'll set forth soon and no
doubt there'll be corporate tax cuts in those and repatriating money
from offshore.”

It will be interesting to see the impact of President Trump's tax plan on private equity underwriters, especially as his administration is peppered with them.

Bloomberg reported in early March:

When it comes to the proposal to replace interest deductibility with immediate expensing -- a move that could meaningfully change
the leveraged-buyout calculus -- the final result is likely to be more
muted, said Rubenstein, who co-founded Washington-based Carlyle in 1987.

Just days to find out who President Trump serves. Government by the PEU for the PEU.

PA showed a serious lack of due care for its client in a number of ways:
it failed to tell UKTI it was procuring the wrong thing; it failed to
provide a full and clear explanation of its costs to UKTI when asked;
and it described passing extra back-office costs to UKTI as being in
UKTI’s interest. PA has told us it accepts it could have been better at
communicating and providing explanations to UKTI. However, its
inconsistent and unclear submissions and explanations, to us and the
National Audit Office as well as to UKTI, seem to us to be more designed
to obfuscate and confuse than to provide clarityPA’s repeatedly inconsistent explanations are indicative of poor record
keeping and a lack of corporate understanding of what happened. It
beggars belief that this would have got through proper quality assurance
and management review processes. We are also concerned that PA’s bonus
scheme for its partners risks incentivising poor behaviour in the
absence of proper controls. PA has acknowledged that the team
negotiating with UKTI did not have the right skills to undertake a
commercial negotiation or to make fair representations to UKTI. It has
also acknowledged that the issues with the UKTI contract should have
been escalated sooner internally.

UK officials escalated these concerns such that the contract was cancelled in January 2016. Interestingly, PA's CEO explained why they sold 51% of the firm to Carlyle:

1) PA is net-asset valued so
acquisition and growth by bolt-ons was not easy. 2) PA has a
sizeable pension scheme looking after large numbers of folk expecting
considerable creature comforts in their retirement. This reduces its
agility. The money brought to the table by Carlyle has enabled Middleton
to insist that the substantial number of PA shares still owned by
former employees are cashed-in, which helps incentivise existing and
future staff. 3) It gives PA favoured access to Carlyle’s 200 portfolio
companies. A virtuous circle of Carlyle using one portfolio member to
nurture others. 4) For a small,
family-like organisation it was high time for some growth especially in
the United States where PA has little traction.

I'll add a fifth. PA knew it needed more political gravitas and Carlyle provided. Proof is PA Consulting has a new gig focused on modernizing Social Security for Scotland. PA Consulting will "work on the development of a new trial Scottish social security system."

Carlyle has long wanted a piece of social security and individual retirement accounts.

Five years ago, Carlyle Group's David Rubenstein predicted a future
where ordinary savers would be able to invest in private equity, an
industry limited to wealthy individuals and institutions.

PA wants growth in the US and President Trump recently floated eliminating the tax that funds Social Security.

In a parallel story consulting giant PwC helped the government of India select 75 cashless townships

To qualify as a less-cash townships, the conditions
included the township must have completed deployment of a
payment acceptance infrastructure, and all the families
residing there would have to covered under training
programmes. Also, more than 80 per cent of the total number of
transactions must have been done through digital modes of
payments during the review period.

Social Security and cash may soon be things of the past. Governments and consultants will have conspired to make this happen. Rest assured private equity is driving both and has plans to profit every step of the way.

"repayment of a portion or all of the outstanding deferred payment
obligation established in connection with the acquisition of Booz
Allen by The Carlyle Group in 2008."

SEC filings show the deferred payment obligation at $158 million when established on May 15, 2008. On December 11, 2009 BAH took on debt to repay Carlyle $100.4 million, $78 million of the deferred payment obligation plus $22.4 million in accrued interest. The current amount owed Carlyle under the DPO is $81.3 million.

Booz paid Carlyle a one time $20 million for investment banking, financial advisory and other services. It also pays Carlyle $1 million per year in advisory fees.

PEU affiliates have the honor of paying, paying and paying sponsors. Carlyle loves cash, especially when the PEU notices early seismic economic shutters.

Update 6-15-17: Did Booz have to fudge to get the funds to pay Carlyle? The Justice Department is exploring the company's bills to Uncle Sam. The story made no mention of PEU ownership or the deferred payment obligation. One has to wonder how that worked its way through overhead and possibly into Uncle Sam's bills.

Sunday, April 16, 2017

The vacant Federal Reserve vice chairman's seat
is a key regulatory role Director of the National Economic Council Gary Cohn and his colleagues on the economic team
want to fill soon. Cohn has interviewed nearly two dozen candidates and
has whittled the list down. Randal Quarles, a veteran of the George W.
Bush administration is one of several candidates left, a source familiar
with the process said.

In June 2003 Quarles spoke on Iraqi Reconstruction. Ten years later an analysis of that effort showed:

Despite a $60 billion U.S effort to rebuild Iraq, life for most Iraqis
has not improved significantly, according to a bitter and regretful
retrospective by Iraqi officials and U.S. diplomats, military officers
and politicians.

Randall Quarles left President George W. Bush's U.S. Treasury for The Carlyle Group where he served on their financial services team. Carlyle made a fortune on BankUnited, which it obtained from the FDIC with billions in subsidies. That sound strikingly familiar to IndyMac and Steven Mnuchin, Trump's current Treasury chief.

The potential Vice Chair of the Federal Reserve served under President George H. W. Bush.

During the Administration of President George H.W. Bush, Mr. Quarles
also served at the Treasury; first as Special Assistant to the Secretary
for Banking Legislation from 1991 to 1992 and as Deputy Assistant
Secretary for Financial Institutions Policy from 1992 to 1993. In those
roles, Mr. Quarles was a principal member of the Treasury's effort to
design comprehensive reform of the laws governing bank capital markets
activities.

"Before joining Carlyle, Mr. Quarles was Under Secretary of the U.S.
Treasury, where he led the Department's activities in financial sector
and capital markets policy, including coordination of the President's
Working Group on Financial Markets, development of administration policy
on hedge funds and derivatives, regulatory reform of Fannie Mae and
Freddie Mac, and proposing fundamental reform of the U.S. financial
regulatory structure."

That's the junk that blew up in 2008. Candidate Donald Trump wouldn't touch a guy like Quarles. Will President Trump appoint another PEU to retain a system that rewards those with the most?

Buyout shops have seized on a performance enhancer that artificially jacks up results, according to many industry executives.The
practice isn’t illegal, and is largely cosmetic, but it allows private
equity firms to goose what’s known as their internal rate of return, or
IRR.

Greed requires those with oversight to look the other way. Quarles played a role in several government performance debacles. I expect none of this to come up if he is nominated for Fed Vice Chair.

Update 4-17-16:WSJreported Quarles will be top financial regulator for Federal Reserve Bank.

ConocoPhillips is selling the San Juan Basin assets to Hilcorp San Juan LP, a partnership between Houston-based Hilcorp Energy Co. and Washington, D.C.-based private equity firm The Carlyle Group.

The Carlyle Group loves to buy distressed assets and got a huge discount from Conoco-Phillips. SeekingAlphanoticed:

Book value of the assets amounts to $5.9 billion, while the company
received just half that amount. This is highly disappointing as the
company actually obtained a 1.2 times book value multiple for the
assets, which were recently sold in Canada.

Private equity's strategy is buy cheap and sell high. Conoco-Phillips can only do so many buy high-sell cheap deals and survive. How did Carlyle and Hilcorp get so lucky?

In an odd twist U.S. Energy Secretary Rick Perry called for a study to evaluate "to what extent regulatory burdens, subsidies, and tax
policies are responsible for forcing the premature retirement of
baseload power plants.” How many baseload power plants does Carlyle own? Last summer Carlyle's Cogentrix asked the state of California to subsidize its natural gas power plants. History shows Governor Rick Perry gave Carlyle Group affiliate Vought Aircraft
Aviation $35 million for 3,000 new jobs. After six years with a Texas sized jackpot, Vought hadn't added to their workforce. Vought cut 35 Texas jobs as of its target performance date. Perry bold face lied and called it a 29,377 job gain. Rick Perry loves to steer public money to his PEU friends and they love getting it.

Update: In another odd twist Alaska Dispatch Newsreported on several Hilcorp oil/gas spills in Alaska and Louisiana. ADN is owned by Alice Rogoff Rubenstein, the wife of Carlyle Group co-founder David Rubenstein. Those reports occurred before Hilcorp and Carlyle announced the San Juan Basin acquisition from Conoco-Phillips

Saturday, April 15, 2017

While American retailers slide into bankruptcy The Carlyle Group increased its bet on Italian fashion brand Twin Set--Simona Barbieri. Carlyle bought the remaining 10% from Barbieri who will leave TwinSet's board and resign from her Creative Designer position.

Twinset is a key investment in the fashion and clothing sector at European level, combined with Golden Goose Deluxe Brand and Hunkemoller, following the (Carlyle's) previous investment in Moncler.--Marco De Benedetti

As TwinSet's co-founder it would interesting to hear Simona Barbieri's take on private equity practices. I'm sure she's experienced much since Carlyle bought 72% of the company in 2012, later upping ownership to 90%. TwinSet took on additional debt to fund a Carlyle dividend in 2014.

It's likely Carlyle purchased her silence in addition to the final 10% stake.

Update 10-11-17: Carlyle hired new designers for Twin Set, the same week it announced an investment in skater style retailer Supreme.

What
is now a $2.5 trillion industry managing money on behalf of public
pensions and the like started as a hodgepodge of so-called leveraged
buyout firms, popularized in the 1980s.

Business
Insider recently sat down with Sandra Horbach, the cohead of US buyouts
at the $158 billion Carlyle Group, to get a sense of how the industry
has changed.

She started with the roots of private equity underwriting (PEU):

When
I started in the business back in 1987, there were two firms with $1
billion in capital: KKR and Forstmann Little & Co.

Bain Capital started in 1984, Oak Hill in 1986 and Carlyle in 1987. The 90's brought Apollo, TPG, Silver Lake and Cerberus.

Thirty years
later, there are thousands of firms with billions in capital. So we've
grown significantly as an industry in a very short period of time.

When I joined Forstmann Little in 1987, right out of business school, it
wasn't even an industry. We didn't call it private equity — it was
leveraged buyouts. It was all about the love of finding great companies
to work with and invest and help build. It wasn't about creating this
mega industry that has since been created.

And that period overlaps with the rapid rise of income for the wealthy and income stagnation or decline for the average citizen. Her love of finding companies to help build doesn't quite fit with

her confession (which goes against the PEU party line).

When
I started in the business, there were a handful of small firms, five,
10 individuals basically looking for great opportunities to invest. Very
little amounts of equity, a lot of leverage. And a lot of returns were
created through financial engineering. The returns that you could
realize back then were significant. You could realize five times, 10
times your money because you were putting smaller amounts of equity into
the entire capital structure.

Horbach confessed her love to "help build" was actually "financial engineering." She knows high leverage places a company at significant risk for default should conditions change. What was not mentioned in the BI interview? The widespread practice of affiliates issuing debt to pay the PEU sponsor a massive dividend.

Horbach shared her "mistake", the implosion of Oriental Trading Company on Carlyle's watch.

Horbach: "... two years into the investment we hit the great recession, and,
simultaneously, the US postal office increased postage rates for
catalogs"

BI: Those two factors seem a bit unpredictable. One the crisis, two the post office.

Horbach: You're right. They were incredibly unpredictable.

Horse hockey to both BI and Horbach. Carlyle's highly leveraged mortgage backed securities vehicle Carlyle Capital Corporation (CCC) entered bankruptcy in spectacular fashion in March 2008, a full six months before Lehman's failure. I believe August 2007 occurred before September 2008.

... an email sent by (Carlyle co-founder William) Conway to CCC chief executive John Stromber on
August 14, 2007—a month after CCC had gone public and as the mortgage
bond market continued to spiral further out of control.

As for Horbach's "unpredictable" assertion Carlyle knew things were going to hell when it asked part owner CalPERS for $681.3 million in capital calls in 2008. Who doesn't love a history rewrite?

Some historians would quibble and say the (LBO-PEU) industry's origins date back much further, though not in any stance like today.

Private equity's tradition of out-sized rewards for the top go far back. The Pharaoh ordered Jewish slaves to make the same number of bricks as before, but they had to gather their own straw. (Exodus 5:7-8)

Idealistic founding father Thomas Jefferson turned PEU in his later years. Smithsonian's article "Master of Monticello" stated this about Jefferson:

It had long been accepted that slaves could be seized for debt, but Jefferson turned this around when he used slaves as collateral for a very large loan
taken out in 1796 from a Dutch banking house in order to rebuild
Monticello. He pioneered the monetizing of slaves, just as he pioneered
the industrialization and diversification of slavery.

Thomas Jefferson levered slaves, which makes him a PEU forefather. Greed is as old as human selfishness and insecurity. Private equity is the master. Returns and image are all that matter.

Thursday, April 13, 2017

United's CEO Oscar Munoz blamed a "disruptive and belligerent" passenger for his on-board beating after stressing the passenger had to be re-accommodated. That Munoz communication failed to mention the passenger's re-accommodation to a hospital bed and the man's need for reconstructive surgery. Munoz eventually worked his way to an apology and accepting responsibility.

United hired CEO Oscar Munoz in September 2015. He took a medical
leave of absence from October 19, 2015 until March 14, 2016. For six weeks of work in 2015 Munoz earned $5.8 million.

The United CEO's 2016 pay should be made public the end of April in a SEC filing. That's also when an operational review will be completed.

Mr Munoz promised employees a review of airline policy on overbooked
flights, and an examination of how they work with city and airport
authorities. The results should be available by April 30.

Change
is in the air for United. Dr. Dao won't fly anytime soon. Injustice
lasts until justice is served. It can come from the top but that
requires reflection, insight and balance, rare characteristics in our
hallowed halls of power.

Munoz needs to promise customers they won't be manhandled on-board after getting felt up by TSA agents via stepped up pat downs. Anger lives against the abuse of power, corporate, police and political. United's customer beating just added to it.

Aside: Munoz was CEO of CSX Corporation prior to joining United. He went from "throwing bums off trains to tossing physicians off planes." That's a step up.

Update 4-16-17: United "will no longer allow employees to take the place of civilian passengers who have already boarded overbooked flights." Translation: United will no longer instruct employees to forcibly evict seated passengers to make room for other employees/contractors.

Saturday, April 8, 2017

A wave of new research shows how as corporations get bigger, the share of money out there going to actual workers declines.

There's been roughly a 10 percent decline in what's known as "labor
share" over the past 30 years. (Barkai's paper looked at the
non-financial corporate sector, which encompasses roughly 80 million
workers.) What this means is that out of the total number of goods and
services produced by corporations, less of it by percentage terms (10
percent less) is going to pay for salaries and benefits—a.k.a. income.

“Only the monopoly-power story can
convincingly account” for high business profits and low corporate
investment.

Private equity underwriters (PEU) can account for high business profits and low corporate investment. Private equity underwriters prioritize interest, dividends and
management/deal fees over capital and human resource investments. Money
is frequently spent on interest expenses several orders higher than
pre-buyout levels. Once cash begins to build corporate capital is spun off to PEU
sponsors as dividends or special distributions.

Vice cited research that supports this practice. Researchers found

"spending on capital inputs, which includes robots, is
declining even faster than spending on labor. As Barkai put it,
"Measured in percentage terms, the decline in the capital share (30
percent) is much more dramatic than the decline in the labor share (10
percent)."

Private equity exploded the last thirty years.

Ten years ago HBR lauded private equity as a model for public companies to follow. That meant focusing on profits and optimizing capital strategies, both to the detriment of worker pay and benefits.

Private equity became ubiquitous in our economy with its rapid growth in assets under management (AUM) from 2000-2015.

PEUs bought companies at over the twice the rate they sold them the last five years.

Sometimes PEU affiliates have the misfortune of being sold to another private equity underwriter.

Thursday, April 6, 2017

Rue21 Inc., a teen clothing chain backed by private equity firm Apax Partners, is preparing to file for bankruptcy, according to people familiar with the matter.

A
filing could come as soon as this month, said the people, who asked not
to be identified because the process isn’t public. As it negotiates
with lenders, the company has a forbearance agreement in place that
lasts through late April.

The filing would continue a tumultuous year for U.S. retail, with
numerous chains seeking bankruptcy protection and others closing huge
swaths of stores. Payless Inc., the discount shoe seller, filed for
Chapter 11 earlier this week.

The stress facing the shoe seller is reflected
in the trading price of its debt, which is far below face value. Its
$520 million senior loan is being quoted at about 52 cents on the
dollar, and its $145 million junior loan is being quoted at about 16
cents on the dollar, according to sources.

Some of that debt was used to pay a dividend to the company's equity owners, Blum Capital and Golden Gate.

Other iconic chains, including apparel label J.
Crew Group Inc and accessories chain Claire's Stores Inc, have started
to look for ways to address their debt loads as their sales shrink.

U.S. apparel retailer J. Crew Group Inc is taking
steps to negotiate with its creditors about cutting the value of its
approximately $2 billion debt load, as its struggles with falling sales,
people familiar with the matter said on Friday.A debt restructuring would underscore the challenges the company has faced since it was acquired by private equity firms TPG Capital LP and Leonard Green and Partners LP in a $3 billion leveraged buyout in 2011.

The private equity investor has been buying
up bonds of Claire's Stores, the jewelry chain it acquired in 2007,
Bloomberg News reported late Tuesday. It's a move that lets Apollo
better control the company's fate, which has been bleak since the firm's
buyout saddled it with more than $2.3 billion of debt.

Buying affiliate debt on the cheap is a backdoor way to equity ownership post bankruptcy. The Carlyle Group undertook this very strategy with Brinton's and Mrs. Fields.

Turn over a struggling retailer today and one finds a PEU. Dividend milking by sponsors deteriorates the company's balance sheet. This enables the PEU to buy back debt on the cheap and have hope of a future equity position for the company they managed into bankruptcy.

Wednesday, April 5, 2017

Two 2007 multi-billion deals face the prospect of refinancing. Kushner Co. purchased 666 Fifth Avenue for $1.8 billion in January 2007 and needs to refinance an interest only loan for $1.2 billion. The Carlyle Group bought Sequa Corp in December 2007 for $2.7 billion and faces $1.35 billion in debt due June 2017.

Both Carlyle and Kushner have prestigious political connections. Carlyle located in Washington, D.C. for that very reason. The Kushner's have connections to current President Donald Trump.

If these folks can't get their billion dollar loans refinanced then the next financial crisis may be looming. Crisis arise when the big money boys no longer trust one another to make good on their bets, I mean debts.

Carlyle prepared to keep at least a small equity stake if Sequa folds. Forbesreported:

(Carlyle) scooped up $235 million in face amount of Sequa’s $350 million in
unsecured bonds, buying them at cents on the dollar in the open market
throughout 2015.

Oddly, Carlyle helped rescue 666 Fifth Avenue in 2008. It flipped its stake in 2012. We'll see if banks and other big money boys trust Kushner and Carlyle to make good on their debts. If yes, they'll get financing. If no, these could be like Carlyle Capital Corporation, the canary in the Fall 2008 financial crisis.

Insider Architect of the Implosion

"I had a choice. I could be an insider or I could be an outsider. Outsiders can say whatever they want. But people on the inside don’t listen to them. Insiders, however, get lots of access and a chance to push their ideas. People — powerful people — listen to what they have to say. But insiders also understand one unbreakable rule: They don’t criticize other insiders."--Larry Summers, Ph.D.

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